The December retail sales report was a disaster, notes Landon Whaley, who recommends shorting the SP...
Yes, stocks are rotating away from risk but does it mean anything?
12/11/2009 5:22 pm EST
But beneath the surface the market continues its rotation away from the energy and financial sectors that led the rally until October. And toward healthcare, which started to move ahead in October, and utilities and telecom, which joined the leadership in November.
So what is the stock market trying to tell us?
A change like that from two sectors—energy and financials--that depend on prospects of strong economic growth to three that are classic defensive plays—with utilities and telecom stocks offering the additional security of relatively high dividend yields—is usually a sign that investors are getting nervous about a rally’s momentum, or stock valuations, or economic prospects. And sometimes all three.
But because it’s the end of the year at the end of a 65% rally from the March 2009 low, it’s hard to tell if this rotation signals some shift in risk tolerance and reward optimism or if it is simply a reflection of end of the year profit taking.
If it’s the former, it’s time to weight your portfolio toward those defensive sectors for 2010. If it’s the latter, there’s really no need to change your sector mix at all.
I’d say wait until next month to find out but next month is January when sectors that have been sold off at the end of the year typically outperform. So if energy and financials move ahead next month, investors still won’t know if stocks were showing a lasting rotation toward lower risk sectors or some not-terribly-meaningful end of the year profit taking.
Sorry but all my crystal ball says is Wait until February. Not much help in a confusing end of the year market, I’m afraid.
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